You need considerable skill and experience to invest successfully in emerging markets given the political, economic and currency risks involved.

Although it is possible to gain exposure to this space through low-cost exchange-traded funds which track indices like the
MSCI Emerging Market Index, there is a strong argument for paying sligthtly more to benefit from a fund manager’s stock picking expertise.

Even the best managers can get caught out by volatility in these markets in the short term, but several funds have performed well in the long-term and particularly in the last 18 months as sentiment towards emerging markets has improved.

Using investment platform AJ Bell Youinvest’s ‘favourite fund’ list we now discuss three relevant funds.

Fidelity Emerging Market Fund (GB00B9SMK778)

• Fund size £2.1bn

• Yield 0.8%

• Annual fee 0.99%

• Top Holdings Naspers, Taiwan Semiconductor, HDFV Bank

• 5-years annualised returns 13.06%

Fidelity Emerging Market is managed by Nick Price who aims to outperform the MSCI Emerging Market Index by 2% a year. Fund consultant Square Mile says: ‘[Price] is happy to construct a portfolio that looks very different to the benchmark and there are few formal risk constraints on the portfolio.’

Jake Moeller, head of UK and Ireland research at Thomson Reuters Lipper, says: ‘Nick Price has established a strong reputation at Fidelity and is a well-regarded fund manager with a steady track record of outperformance to his name’.

The portfolio tends to be made up of mid to large cap names and will typically consist of 75 holdings although the number can range between 60 and 120 at any one time. Price and his team look for companies that can withstand competitive pressures and are able to compound attractive earnings growth throughout the economic cycle.

This is a truly global fund, with three regional portfolio managers. Amit Goel is responsible for emerging Asia, Angel Ortiz for Latin America and Greg Konstantinidis for Europe, Middle East and Africa stocks.

Simon Dorricott, associate director of Morningstar, notes the growth style fell out of favour in 2016 and as a result the fund saw a period of relative weakness. However, he adds in the longer term ‘investors have been well rewarded’.

Lazard Emerging Markets (GB00B24F1G74)

• Fund size £1.1bn
• Yield 1.7%

• Annual fee 1.06%

• Top Holdings China Construction Bank, Sberbank of Russia, Taiwan Semiconductor

• 5-years annualised returns 8.25%

Lazard Emerging Markets is run from New York by James Donald who Moeller describes as ‘an emerging markets veteran who is able to navigate the often choppy waters of this region’.

The investment team aim to identify companies that are trading on favourable valuations or in other words priced cheaply relative to their financial strength. They will also consider companies with improving financial returns.

Square Mile says: ‘Their fundamental research discipline has worked well in uncovering valuation anomalies and helped isolate the managers from the swings in sentiment that can dominate these markets from time to time.’

Moeller agrees, saying that as the portfolio uses Lazard’s ‘forensic’ accounting approach to pick stocks it will generally have lower volatility against the benchmark.

This fund also uses bond analysts to help the bottom-up stock pickers with information on the macro situations of countries within the region. Bond prices and yields are often a good indicator of a country’s economic health so is a useful tool to have in reserve.

Potential investors should note that Lazard has periodically closed this fund to new investors as the manager runs considerable assets in emerging assets. Also, liquidity is a consideration for the investment team which limits the potential for investing in smaller but potentially fast-growing companies.

JP Morgan Emerging Market Income (GB00B5N1BC33)

• Fund size £294.55m

• Yield 3.8%

• Annual Fee 0.93%

• Top holdings Taiwan Semiconductor, Moscow Exchange, China Mobile

• 5-years annualised returns 8.49%

JP Morgan Emerging Market Income has three managers; Omar Negual, Amit Mehta and Jeffrey Roskell. It is the odd one of the trio with a focus on income although the managers will not sacrifice growth for the income according to Square Mile.

Moeller says: ‘The concept of sustainable dividends in this region may be difficult for many investors to appreciate and justifiably so.’ However, he adds that the team can find companies prepared to fund dividends out of strong cash flow.

‘In a market where investors are looking for yield, it is an attractive proposition but the broader risk of emerging markets investing still applies,’ Moeller says.

Square Mile thinks the fund’s well-defined philosophy and process it follows regardless of market conditions is one of the fund’s best attributes.

The fund’s management saw a major change in 2015 when its former lead manager Richard Titherington left for Hong Kong to become chief investment officer of JP Morgan’s Emerging Markets and Asia Pacific Equities team. However, Square Mile doesn’t see this development as a significant change in terms of the fund’s long-term strategy.

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